Posted 06/08/2020

What is going on?

5.0

Quality

Exuberance Fed Markets

Seriously, what is going on? Davey Day Trader and the Robinhooders seem to be doing pretty well with airline stocks and buying bankrupt companies, but Carl Icahn sold out of his HTZ at $0.70, the CFO sold at $1 and today it's trading at $5.53, back above pre-bankruptcy levels. Everyone has a nice story for what is happening: people are at home bored so they're trading stocks, fed liquidity is creating another asset bubble, quants are jumping into the retail momentum and high short interest is squeezing everything up and up. I figured I might as well document my perplexity in case anyone else has something to add that I'm missing

Investment professional are liable to overthink the situation. Perhaps the best approach is to invert and go with your gut: sentiment is getting out of control, agnostic of Robinhood, quant positioning, or the like. It happened during the tech bubble, it happened with Bitcoin, and it's happening now.

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In my mind, that leads to the question of whether or not investment professionals are actually more likely to outperform non-professionals on average and over time. If your gut tells you this is irrational exuberance then it's only a matter of time before the next correction. How do you position for that with no inkling of timing? Soros tells us "when I see a bubble forming, I rush in to buy, adding fuel to the fire." Is this even so clearly a bubble?

Either way, in this environment I'm wishing I was either a lot smarter or a lot dumber.

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Frankly it doesn't make any sense but that doesn't mean it can't stay irrational for longer. The one thing I'll say about this rally is that it institutional and "smart money" sentiment has been a contra indicator at each turn. Heading into April sentiment was worse than I had seen in a long time, with most smart investors (and data to back this up) believing we would re-test March lows. Sell the bounce. Heading into May the rally seemed especially long in the teeth. I think the last month has exhausted anyone fighting the Fed. That said it isn't time to capitulate and jump in - focusing on high quality, durable and well positioned post-COVID companies with strong cash flow and sustainable, differentiated competitive advantages should pay off. In the short run the market is a voting machine, long run it is a weighing machine.

I do think there are some downside catalysts to 2H...any resurgence would be devastating (especially post-summer once economic engine has revved back) and when unemployment checks expire we'll see some discretionary spend dry up. We'll see.

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Agree. Asset prices are disconnected from underlying fundamentals. The underlying cause, in my view, is the Fed. Powell made it VERY clear today they are focused on getting back to full employment and generating inflation - if asset prices double from here in the process, he doesn't care. Financial asset inflation is not a concern. This is the "blow off top" in growth we were referring to in the predictions.

Tying this back to the Capital Allocation post, there's nowhere to put money. So people are forced out on the risk spectrum. And then combine this with a very unique environment - people are sitting at home, getting paid ("free money") to do nothing.. while also not being able to bet/gamble at casinos, on sports, etc... it's a perfect recipe for speculation. This article below highlights some of what I'm referring to:

https://www.wsj.com/articles/individuals-roll-the-dice-on-stocks-as-veterans-fret-11591732784

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Also agreed @jlm278. Markets may be (mostly) efficient, but that doesn't mean that they're rational. As you suggest, let's not lose sight of what the market is: a way to gauge the prospect of future free cash flows. In the long run, the market will reflect the reality of underlying business fundamentals. If we focus on high quality companies with long-term discipline, reality eventually rears its head.

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